Blogs: Kathleen M. Packard
There was little question that Narendra Modi would win India’s drawn-out election progress. When Modi and his Bharatiya Janata Party replaces the Congress Party in India’s government, changes are expected – by economists and by the Indian people. What is question is what kind of economic changes await India. Modi’s claim to fame is impressive economic development in Gujarat. The question is whether he can replicate that growth across India.
The Indian economy is in need of a jump start as both investment and GDP growth have slowed dramatically, but Derek Scissors, resident scholar at the American Enterprise Institute observed: “There is no point expecting Indian to adopt an ideal economic reform program. The country is still full of quasi-socialist and has not made up its mind what it wants much less how to achieve it.” The problems are daunting. Saritha Rai wrote in Forbes.com: “In recent quarters India, the so-called emerging markets giant, has been caught in a cycle of rising inflation and flagging growth. Trapped up in the worst post-liberalization economic phase, the country slowed from blazing, double-digit GDR growth rates to half that, around 5%, in recent years.
Retail inflation averaged 10 percent last year, as prices of daily essentials such as onions shot up and pinched India’s millions of poor who survive on less than $2 a day. Industrial production has steadily fallen in the past months. The rupee fell steeply against the dollar last year.
In the last years of Congress Party rule, the economy slowed considerably. The Wall Street Journal’s Sean McClain wrote: “Bureaucratic red tape and a slowing economy has derailed 6.2 trillion rupees ($104 billion) of investments in India, according to the Centre for Monitoring the Indian Economy—a number the new government will need to reduce if it wants to jump-start economic growth.
Hundreds of hotels, airports, factories, roads and other projects are on hold or canceled. The manufacturing sector was hardest hit, with projects worth 3.2 trillion rupees put on hold, the highest figure in almost two decades, according to data from the Centre for Monitoring the Indian Economy, an economic data provider.
Modi himself has set an ambitious agenda. As the BBC’s Linda Yueh has written, Modi “has pledged to build manufacturing hubs, cities, hydroelectric power plants, and even bullet trains - essentially an India that is industrialised and urbanised. That has eluded India for some time and is the key to faster economic growth.” Yueh noted: “Manufacturing is only 14% of GDP and industrial production, including utilities, is only a quarter of national output. It is essentially unchanged since 1960 which means that India isn't industrialised unlike the other Asian giant, China. Manufacturing is in line with the levels of post-industrialised economies and lags far behind that of other Asian economies that have grown quickly on the back of moving out of agriculture and into production.
M.G. Arun wrote in India Today: “Manufacturing, which Finance Minister P Chidambaram termed as the Achilles Heel of the Indian economy, suffered a deadly blow under the present government. According to government statistics, manufacturing output is seen declining 0.2 per cent in 2013-14 compared to a 1.1 per cent growth in the previous year, even as promises to take manufacturing's contribution to 25 per cent of the GDP in a decade remains on paper. ‘Implementation will be the key for a new government to get projects in track and restore business confidence,’ says Madan Sabnavis, Chief Economist of CARE Ratings. In February, BJP's prime ministerial candidate Narendra Modi said that the country needs to focus on the manufacturing sector, especially electronics and defence to reduce its high dependence on imports and ensure inclusive growth, spelling out his priorities if voted to power.”
The Congress Party regrettably shied away from tough decisions over the last decade. Writing of the departing Manmohan Singh, the Economist observed: “His economic record is mixed-to-good, though in the current gloom—growth stuck below 5%—that assessment meets with raspberries. On his watch India’s economy more than doubled in size, as growth averaged over 8% until two years ago. The World Bank on April 29th ranked India’s economy as the world’s third-largest, replacing Japan’s (using purchasing-power parities). Elsewhere, a civil-nuclear deal with America brought benefits, notably imported uranium. And he had the grit to reduce huge subsidies on petrol and diesel, angering urban voters and politically well-connected lorry bosses.”
A $100 billion BRICS Development Bank was announced in March 2013 at a BRICS summit in South Africa. The development bank, however, is still developing, and Brazil, Russia, India, China and South Africa are having a rough year.
Back in March, TIME’s Rana Foohar wrote: “The fact that the American economy is growing faster than not only Russia’s but also Brazil’s and those of the emerging market nations is truly amazing. A decade ago,t he BRIC countries were supposed to be the world’s economic salvation. Since then, they’ve become complacent, and their growth has been cut in half. Some, like China are brewing up epic debt crises. Others, like Russia and Turkey, are ruled by autocratic strongmen trying to grapple with tumbling markets and foreign-capital flight on a massive scale.”
South Africa’s problems are particularly severe; the economy has slowed to a crawl, partly as a result of crippling strikes. Uncertainty and unhappiness regarding the recent elections have not helped even though the African National Congress managed to win more than 60 percent of the vote. The Economist has reported: “Unemployment has risen to 25% of the workforce, or 36% including those who have given up looking for work. A growing sense of disquiet about South Africa’s present—and anxiety about its future under a fractious ruling party—makes it hard for many South Africans to accept that anything has changed for the better since 1994.”
The Economist observed: “Three of the biggest problems are South Africa’s rigid labour laws, its unskilled workforce and a business climate that is increasingly unfriendly to much-needed foreign investment. Bargaining councils made of big established businesses and trade unions meet every so often to agree on wage levels and conditions of work. The minister of labour is then obliged to extend such agreements to all businesses in the industry. Big firms can live with the deals they cut with unions and find ways to comply with racial quotas set by affirmative-action laws. But small businesses struggle. As a result South Africa has a dismal rate of small-business creation in comparison with the BRIC countries—Brazil, Russia, India and China.”
South Africa desperately needs to release its entrepreneurial potential. Bloomberg Businessweek reported: “South African President Jacob Zuma pledged to intensify efforts to reduce poverty and unemployment and boost economic growth after his party won elections by the lowest margin since it took power 20 years ago.
“We will use our majority to implement policies and programs that further improve the quality of life for all, especially the poor,” Zuma, 72, said at the official release of the results in Pretoria yesterday. “There is a lot that we have to do and we are determined to do more.”
Zuma’s credibility, however, has steadily been eroded by corruption scandals. Never a bold economic thinker, Zuma has always been known more for his populist appeal. South Africa deserves better. As the British Guardian lamented: “Two decades of modest economic growth have left the white minority better off than ever but half of young black people without a job. South Africa is one of the most unequal societies on Earth and reaping a whirlwind of frustration and unrest.”
Nigeria has problems. The country – probably Africa’s biggest economy – also has a lot of potential. Matt Egan reported for CNN Money: “Nigeria has been one of the hottest destinations for foreign investment in the developing world in recent years. Big companies and investors have been attracted to the country's booming economy, abundant natural resources and rapidly-expanding middle class.”
But the fact that militants from Boko Haram were able to carry out their brazen attack on a boarding school could scare away Western investors. Clearly, security is still a real threat.
The focus on Nigeria was emphasized by the meeting of the World Economic Forum in Lagos in early May. Fox News’ Perry Chiaramonte wrote that President Goodluck “Jonathan administration's apparent bungling of the kidnappings, only the latest in a long series of atrocities committed by Boko Haram, runs counter to the image of competence Nigeria desperately seeks to portray to the international community.”
“The country is the world's eighth-largest oil exporter, and almost 90 percent of its export earnings are tied to oil. Sixty percent of the population lives in extreme poverty, youth unemployment is close to 80 percent, and on top of that there is the almost daily violence in the north, where rebel group Boko Haram is fighting for a state governed by sharia law,” noted Aljazeera.
There are chronic power shortages, which can increase the cost of doing business in the country by up to 40 percent. The entire national grid only delivers as much electricity as Qatar, which is not nearly as big or populous a country. And for a country with great oil wealth, there is the mysterious issue of falling oil revenues. This is the case of Lamido Sanusi, the central bank governor, who was suspended after blowing the whistle on a $20bn hole in the accounts of the state oil company.
There are also monetary policy problems facing the country as it seeks to conserve the profits from the oil industry. Augustine Aminu wrote in Nigeria’s Daily Times: “The Acting Governor of the Central Bank of Nigeria (CBN), Dr Sarah Alade, says it is important for Nigeria to have reserves to ensure effective monetary policy and economic growth....The governor said the reserves could be either in the form of excess crude account or sovereign wealth fund. She said that though the country had cash reserves, it was not enough compared to what the country was making from oil.”
Tragically, the security of the country’s considerable assets and the safety of its inquiring young women are endangered by an incompetent and too often corrupt government.
Pity the Poles. They are caught between a rock and a very hard place. “Poles had good reasons to count their blessings as their neighbor Ukraine began sliding into turmoil this year,” wrote Bloomberg Businessweek’s Carol Matlack. “Poland is not only a stable democracy with its defense assured by NATO—it’s also one of the European Union’s star economic performers. The central bank in Warsaw forecasts the economy will grow 3.6 percent this year, more than three times the projected EU average of 1.1 percent.
But as the conflict in Ukraine drags on, fears of contagion are rising. The central bank this week held its benchmark interest rate at a record low, citing what bank chief Marek Belka described as the “dynamic and very serious” situation in Ukraine.
A Markit Economics survey of Polish purchasing managers found that business sentiment in April fell to a nine-month low. Polish consumer confidence declined during April, according to European Commission data.
Indeed, noted Bloomberg News’ Dorota Bartyzel recently, “Poland’s economic growth quickened to the fastest pace in two years as record-low borrowing costs revived investment and consumer spending.....Poland is set to outperform the European Union’s largest post-communist members this year and in 2015, according to a spring forecast by the European Commission. Borrowing costs have been kept at a record low since July and policy makers have pledged to keep the key rate unchanged until at least the end of the third quarter to bolster consumer demand and investment.”
But there are problems, noted the Economist in March. “[T]he OECD, an intergovernmental think-tank, said that more reforms are needed to get the economy growing fast again. The country ought to raise productivity by liberalising the labour market, privatising state-owned enterprises, cutting red tape and making agriculture competitive.”
Despite progress, participation in the labour market remains limited. This problem will deepen as the working-age population shrinks. Poland’s birth rate is low and emigration, especially of the young and skilled, remains high.
A cautious Polish central bank has kept interest rates at a record low and has pledged to keep them steady. But the uncertainty regarding Ukraine means that the future of Polish exports – 8 percent of which go to Russia and Ukraine – also is uncertain.
While many Poles continuing to seek their future abroad, the recent past has been relatively good to Poland, noted the Guardian’s Remi Adekoya: “Of the 10 mostly post-communist countries that joined the European Union exactly a decade ago today, none has benefited more from membership than Poland. First and foremost, there's the cash: the country received £56bn in development funds between 2007 and 2013, money that was used to build hundreds of kilometres of highways and express roads as well as youth sports facilities, modern sewerage systems, kindergartens and pre-schools.”
Add to that the £60bn earmarked for Warsaw in the EU's 2014-20 budget and the country will have enjoyed a windfall equivalent to roughly double the value of the Marshall Plan, calculated in today's dollar figures.
Despite the April job numbers, the Federal Reserve continues to slow walk the economy forward. “Federal Reserve Chair Janet Yellen and her colleagues have lowered their sights on how fast the economy needs to expand to meet their goal of cutting unemployment,” Bloomberg News has reported. “No longer are they saying growth must accelerate from the 2 percent to 2.5 percent pace it has generally averaged since the recession ended. Instead, they are stressing the importance of preventing the expansion from faltering.”
Of course, the economy has been stumbling and faltering for years. Carnegie Mellon Professor Allan Meltzer wrote in the Wall Street Journal that “some side effects of the Fed policies have had ugly consequences. One of the worst is that ultralow interest rates induced retired citizens to take substantially greater risk than the bank CDs that many of them relied on in the past. Decisions of this kind end in tears. Another is the loss that bondholders cannot avoid when interest rates rise, as they have started to do.
Accumulating data from the sluggish loan market and the weak responses of employment and investment should have alerted the Fed that the growth of reserves and the low interest rates haven't been achieving much. Similarly, the Fed should have noticed in recent years that instead of a strong housing-market recovery, not many individuals were taking out first mortgages. Many of the sales were to real-estate speculators who financed their purchases without mortgages and are now renting the houses, planning to resell them later.
John Cassidy observed in the New Yorker blog in April: “The longer the Fed keeps interest rates at ultra-low levels and promises not to raise them rapidly, the greater the danger of history repeating itself. Two things that we know about bubbles are that, once they get going, they are self-reinforcing, and that they place central bankers in a bind. For as long as the bubble lasts, the economy looks great, and policy makers have an incentive to let it proceed. This is what happened to Greenspan and Bernanke.”
The Fed disdains any inflationary impact of its policies, but elsewhere in the Wall Street Journal, Josh Zumbrun wrote: “The two main U.S. inflation gauges, the Labor Department's consumer-price index and the Commerce Department's personal consumption expenditures price index, are hovering near the lowest levels ever seen outside of recessions.
Both sit poised to drift upward. Wholesale and import prices show signs of picking up, suggesting some inflation in the pipeline, and some items that briefly declined in price over the past year—such as prescription drugs, financial fees and garments—have started climbing again.
Zumbrun noted: “The Commerce Department's PCE and the Labor Department's CPI assign different weights to the basket of goods they track, and use differing statistical methodologies, to estimate inflation. The Fed prefers the PCE index, which tends to show slightly lower inflation than the CPI.”
Too much inflation may reveal an overheated and overstimulated economy. Yet for many economists, somewhat more inflation would be a sign of vigor, while less inflation—a potential effect of an overseas slowdown or continued labor-market weakness—would signal weakness and stagnancy.
In an April speech to the Economic Club of New York, Yellen had stated that she expected inflation to rise somewhat. Meanwhile, unemployment will rise in Boston when the Federal Reserve of Boston slashes 160 jobs due to a new Treasury policy.
BY KATHLEEN M. PACKARD: